Citigroup to pay $7B in subprime mortgages probe

WASHINGTON — Citigroup agreed Monday to pay $7 billion to settle a federal investigation into its handling of risky subprime mortgages, admitting to a pattern of deception that Attorney General Eric Holder said “shattered lives” and contributed to the worst financial crisis in decades.

The settlement represents a moment of reckoning for one of the country’s biggest and most significant banks, which will now be responsible for giving financial support to Americans whose lives were dismantled by the largest economic meltdown since the Great Depression.

Besides the $4 billion civil penalty, the bank will also provide $2.5 billion in consumer relief to help borrowers who lost their homes to foreclosure and will settle claims from state attorneys general and the Federal Deposit Insurance Corporation.

Holder said the settlement did not preclude the possibility of criminal prosecution for the bank or individual employees in the future.

“We’re talking now about what we have,” he said.

To put the penalty in perspective, the total settlement package represents about half of Citigroup’s $13.1 billion profit last year. The bank should have the capital needed to absorb the $7 billion settlement, said Gerard Cassidy, a managing director and analyst at RBC Capital Markets.

The settlement stems from the sale of toxic securities made up of subprime mortgages, which led to both the housing boom and bust that triggered the Great Recession at the end of 2007. Banks, including Citigroup, minimized the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts and pensions, as well as other banks and investors.

One Citigroup trader wrote in an internal email that he “would not be surprised if half of these loans went down” and said it was “amazing that some of these loans were closed at all,” and the bank itself increased its profits and share of the market, the Justice Department said.

“They did so at the expense of millions of ordinary Americans and investors of all types — including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities,” Holder said at a news conference announcing the settlement.

The securities, which contained so-called residential mortgage-backed securities, plunged in value when the housing market collapsed in 2006 and 2007 and investors suffered billions of dollars in losses. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

The Justice Department, which has faced criticism for not being aggressive enough in targeting financial misconduct, has in the last year taken action against some of the country’s largest banks for their roles in the financial meltdown.

JPMorgan Chase &Co., the nation’s largest bank, last year agreed to pay $13 billion after an investigation into similar toxic-mortgage backed securities. That deal included $4 billion in relief to homeowners affected by the bad loans. Bank of America Corp. has been sued for failing to disclose risks and misleading investors in its sale of mortgage-linked securities.

Justice Department officials called the $4 billion the largest civil penalty of its kind and said it will not be tax-deductible.

The $2.5 billion in consumer relief is directed at underwater homeowners and borrowers in areas of the country with high numbers of distressed properties and foreclosures. The sum includes refinancing for homeowners struggling with high interest rates on their mortgages, closing cost help for borrowers who lost homes to foreclosure and financing for construction and affordable rental housing.

Investors shrugged off the settlement, a sign that they expect Citigroup will continue to operate without much disruption. Shares in Citi rose $1.67 — or 3.6 percent — to $48.67 because the bank beat the expectations in the market, after adjusting for the second-quarter $3.8 billion charge related to the Justice Department settlement.

RCB’s Capital Markets’ Cassidy said the “unintended consequence” of the settlement is that banks such as Citigroup are less likely to lend, hurting would-be homebuyers with student debt who are seeking a mortgage.

“Banks won’t go near those customers because, in our opinion, the severity of the penalties that they paid,” Cassidy said.

CEO Michael Corbat said the settlement ends all pending civil investigations related to Citigroup’s handling of mortgage-backed securities.

Citigroup said its net income dropped in the second quarter after the settlement was arranged.

On a per-share basis, net income was 3 cents, compared with $1.34 in the second quarter a year earlier. Excluding the charges and an accounting loss, the bank’s second-quarter profit rose 1 percent to $3.93 billion, or $1.24 a share.

Revenue was $19.4 billion, excluding the accounting loss, compared with $20 billion a year earlier.

The two sides had earlier been far apart in their negotiations. The Justice Department was preparing to sue the bank last month after it offered to pay under $4 billion to resolve the matter, a sum substantially less than what the government was seeking.

Recent criminal cases against banks have included a $2.6 billion guilty plea from Swiss bank Credit Suisse for helping wealthy Americans evade taxes, and an $8.9 deal with BNP Paribas related to its handling of transactions for clients in Sudan, Iran and Cuba.

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